By Steven T. Feldbauer, JD
Many businesses are not aware of the Tangible Property Regulations (a.k.a. “Repair Regulations”) that were finalized by the IRS that are applicable to tax years starting on or after January 1, 2014. These now-final regulations, which are known mostly only by tax professionals/accountants, do have significant implications for taxpayers with buildings, fixed assets, tenant improvements, and/or repair and maintenance expenses. Most businesses, especially those in the school industry, should be considering filing a Form 3115 Application for Change in Accounting Method to comply with the numerous new provisions within the final Repair Regulations. Generally, this additional Form 3115 requirement is required for taxpayers that have over $10M in gross receipts and $10M in assets. However, even though this development may sound like an additional burden and cost for taxpayers, keep reading – there may be significant tax benefit and value to filing the Form 3115.
Form 3115 – Compliance Burden That May Present Potential Tax Benefit
Along with the finalization of the Repair Regulations, the IRS updated and made significant changes to the general Section 446(e) procedures for obtaining advance and automatic consent to change a method of accounting for federal income tax purposes. The IRS also updated the comprehensive list of accounting methods, including several dozen areas related to the Repair Regulations. This alert will not go any further into the significant technical complexity of these changes promulgated in Revenue Procedure 2015-13 and Revenue Procedure 2015-14, but instead will summarize the following potential tax benefits that could be possible under the new facts and circumstances analysis required under the final regulations and resulting Form 3115 filing:
- Partial disposition election to deduct replaced building components
- Immediate tax deduction of capitalized repairs or remodeling costs
- Immediate tax deduction of previously capitalized leasehold improvements or portions thereof
- Safe harbor tax deduction for routine maintenance
- Protection from IRS Audit
Taxpayers may be able to realize significant current year write-offs of assets that were placed in service years ago and are currently being depreciated for tax purposes over very long time periods.
It should also be noted that, through recent relief in Revenue Procedure 2015-20, eligible “small-business” taxpayers that have less than $10M in gross receipts or less than $10M in assets are now allowed to make certain accounting method changes under the Tangible Property Regulations without filing Form 3115. All other taxpayers are required to perform an analysis of their fixed assets and their depreciation, capitalization, and expensing methods that have been employed in all years prior to 2014 to determine their compliance with the new standards and requirements in the Repair Regulations. Whether exempt or not under Revenue Procedure 2015-20, we recommend exploring whether there are tax benefits to be found over and above the perceived burden of Form 3115 compliance.
Seek Guidance Now from McClintock & Associates on the Potential Benefits of a Repair Regulations Analysis and/or Form 3115 Audit Protection
Although the new technical and procedural requirements and implications are extremely complex, there is potential taxpayer benefit and the potential for immediate cash flow increase in a difficult economic and regulatory climate for schools. At minimum, even if zero additional tax deduction is found, there is the benefit of risk mitigation through protection from future IRS audit as a result of compliance with filing Form 3115. Finally and importantly, any additional tax expense that can be found reduces taxable income only (through a tax-only Section 481(a) adjustment) and does not reduce financial statement income and/or negatively impact composite score.
Volume 2, Issue 2